Its important to remember that not all loans are created equally. Borrowing to fund your business could pay off in the long run, but only if you pick the type of loan carefully. Here’s what you need to know about all the different loans available to small businesses.
Special category loans
Financial institutions often offer loans with special features for special categories. There are special grants and funding options for women, for example, as well as a range of small business startup loans with bad credit. Do your research to figure out if your business fits a special category.
Related: Best small business loans in the UK – We explore whether a loan is the right finance option for you along with some of the best small business loans in the UK market.
Government start-up loans
The most common form of funding for small businesses in the UK is the government’s startup loan programme. These start up loans are available for all small businesses from a agencies right through to a manufacturers. Startup loans can be used to get your small business off the ground with support from the government. These sort of loans are suitable for entrepreneurs who need to get started with a low-cost and flexible loan programme.
The business needs to be older than two years and you can borrow sums ranging from £500 to £25,000.
Business lines of credit are traditional funding options for companies of all sizes. The line of credit is an arrangement with the bank to access a loan when it is needed. This means your business has access to money whenever required, but doesn’t have to pay interest or borrow a large sum right away. These loans are ideal for entrepreneurs who need to protect their operations. The short-term loan from a line of credit can help a business stay afloat and fund working capital while waiting for cash flow to improve. However, these loans are not suitable for anything long-term.
Similarly, a revolving line of credit (where the business if offered a fixed amount of capital on a revolving basis) is only useful for filling the short-term gaps in business funding.
Friends and family
The first and last resort for many business owners across the country is a loan from an acquaintance. Family and friends may be willing to offer you money in exchange for a decent return. A survey found that nearly 60 per cent of Brits were borrowing from family after the recession. Of course, these loans may be cheaper and more flexible than ones offered by banks or the government. When you’re just getting started, a flexible loan from a loved one gives you the freedom to creatively push your business’ growth. However, personal loans from close friends and family can backfire if you don’t manage the relationship well.
Picking the right type of loan depends on your circumstances, credit rating, business experience, and funding needs. Take the time to go over all the options before you decide to add leverage to the business.